We propose a novel method to find Nash equilibria in games with binary decision variables by including compensation payments and incentive-compatibility constraints from non-cooperative game theory directly into an optimization framework in lieu of using first order conditions of a linearization, or relaxation of integrality conditions. The reformulation offers a new approach to obtain and interpret dual variables to binary constraints using the benefit or loss from deviation rather than marginal relaxations. The method endogenizes the trade-off between overall (societal) efficiency and compensation payments necessary to align incentives of individual players.
The manuscript with the theoretical background of dual variables in integer programs and the mathematical explanation of our method was published in the European Journal of Operational Research (see below). Preprints and working versions can be downloaded from arXiv and OptimizationOnline.
This repository includes the GAMS codes for the numerical results for the electricity market example presented in Chapter 4 and the Appendix of the manuscript (including all data), as well as an additional illustrative example of a natural gas investment and operation game.
Please cite as: Daniel Huppmann and Sauleh Siddiqui. “An exact solution method for binary equilibrium problems with compensation and the power market uplift problem”, European Journal of Operational Research, 266(2):622-638, 2018, DOI: 10.1016/j.ejor.2017.09.032.
binary Nash game, non-cooperative equilibrium, multi-objective optimisation, compensation, incentive compatibility, electricity market, power market, uplift payments
C72, C61, L13, L94
90C11, 90C46, 91B26
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